Argentina Inflation Unbelievable No More Stokes Surge in Linkers

  • Macri revamps data agency after years of alleged misreporting
  • Buenos Aires's 26.9% CPI will be used to calculate bond payout

President Mauricio Macri’s push to restore confidence in Argentina’s economic data is creating a windfall for bond investors.

The country’s inflation-linked notes have jumped 17 percent since Oct. 25, when Macri’s surprise showing in the first-round of presidential elections set the stage for his victory a month later. That’s the biggest gain among similar bonds from Latin America tracked by Barclays Plc. And the rally is far from over, says Balanz Capital.

Macri, who took office Dec. 10, is revamping Argentina’s national statistics agency after years of alleged misreporting of data. Last week, the government said it will use an inflation index from the city of Buenos Aires, which at 26.9 percent is nearly double the national rate reported by the previous administration, to calculate bond payments. Consumer prices in the city are also poised to rise faster as Macri strips electricity subsidies from consumers who can afford to pay higher rates.

“The city of Buenos Aires has the highest inflation in the country, and it’s going to be the most affected by an increase in utility prices,” said Martin Saud, a fixed income trader at Balanz.

He recommends buying Argentina inflation-linked bonds due in 2018.

Macri declared a “statistical emergency” in his first month in office to rebuild the data agency and replace a consumer price index created in 2014 by then-President Cristina Fernandez de Kirchner’s government. In 2013, Argentina became the first nation censured by the International Monetary Fund for unreliable economic data. 

Investors and analysts have questioned Argentina’s official inflation and economic growth data since 2007, when Fernandez’s late husband and predecessor Nestor Kirchner replaced senior officials at the statistics agency.

Macri’s government has stopped reporting data while it rebuilds the agency. Graciela Bevacqua, a director at the national statistics institute who was among officials replaced by Kirchner in 2007, said on Jan. 14 that a new nationwide inflation index may not be ready until about September. The government will stop using Buenos Aires’s inflation gauge to calculate bond payments once the new national index is available.

“For a long time, we weren’t recommending inflation-linked bonds, but now we expect they’ll reach their goal of providing coverage against inflation,” Jacqueline Maubre, a senior investment officer at Cohen Group in Buenos Aires, said in an interview.

Macri’s bid to rebuild trust in the nation’s economic data is part of his effort to undo policies put in place by his predecessors that have throttled foreign investment and kept the country locked out of international credit markets since 2001.

Argentina policy makers led by central bank President Federico Sturzenegger have pledged to make fighting consumer price increases their top task. Finance Minister Alfonso Prat-Gay said he expects inflation to be close to 5 percent by Macri’s fourth year in office.

On Dec. 30, Energy Minister Juan Jose Aranguren said that new electricity tariffs will be set starting in February in order to remove subsidies in greater Buenos Aires.

Some residents in the Argentine capital pay as little as 45 pesos ($3.35) every two months for electricity bills because of the subsidies. 

The move may cause inflation to surge, according to Mariano Tavelli, president of brokerage Tavelli & Co.

“If inflation skyrockets when utility prices are adjusted, inflation-linked bonds are going to see a rally,” he said.

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